Teva might have prescription to keep up its healthy returns

Lauren Rudd

Published: Friday, January 24, 2014 at 1:00 a.m.

Last Modified: Thursday, January 23, 2014 at 5:10 p.m.

In the story of "The Ugly Duckling" by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of Teva Pharmaceutical Industries (Teva), an "ugly duckling" that just might mature into a beautiful swan in the ensuing year or two. See what you think.

Teva's shares recently hit a one-year high, rising 4.6 percent to $45.45, after the manufacturer of generic pharmaceuticals indicated it plans to return to the deal-making strategy that made it one of the most acquisitive drug companies of the past decade.

"We have to do the clever deals that Teva was so good at doing in the past," chief financial officer Eyal Desheh said recently. Desheh's tone signaled a major shift in approach from Teva's former chief executive officer, Jeremy Levin.

Erez Vigodman is the new CEO, and one of his key responsibilities will be to reduce costs by $2 billion to make up for this year's patent expiration of Copaxone, the company's top selling multiple sclerosis treatment.

Teva has received positive comments from analysts who see on-going potential and have raised their target price, and the Soros Fund increased its equity stake in the company.

So what do so many others fail to grasp? For one, Teva is the world's largest generic company with an established portfolio of specialty medications. So Teva is strategically positioned to benefit from the changing dynamics of the global health care industry as it shifts from patented to generic medications.

Generics accounted for 51 percent of Teva's total annual revenue in 2012. In the U.S., Teva accounts for about 16.2 percent of all generic prescriptions. And Teva's specialty pipeline includes candidates that focus on central nervous system and respiratory drugs, along with a selective innovation of products for oncology, women's health and biologics.

Yes, the patent expiration of Copaxone in the coming months is a major concern. Yet ProAir and Qvar are expected to add significantly to revenues. Teva also plans to enhance its existing brands, while developing products for asthma and chronic obstructive pulmonary disease with differentiated inhalers.

Teva has a solid respiratory pipeline with the recent FDA filing for approval of DuoResp, while a number of products in Phase II and III testing are designed to treat asthma. Approximately 8 percent of the U.S. population suffers from asthma and the number is growing. This arena could significantly add to revenue and earnings growth.

Teva trades at a conservative 9.72 times 2014 earnings. Revenues for the first six months of th`e year came in at $9.82 billion, down 2.7 percent year-over-year. Earnings fell from $1.72 billion to $178 million on the back of $1.62 billion in settlement, impairment and restructuring charges. Teva's guidance has 2014 revenues at around the $20 billion mark, while 2014 non-GAAP earnings are estimated at $4.85 to $5.15 per share.

The patent expiration of Copaxone could put $4 billion of revenues at risk. Yet the nearly $2 billion in planned cost savings and an increased generics pipeline have the potential to overcome that problem.

Nonetheless, two issues merit consideration: the restructuring and legal expenses inherent in Teva's focus on generics, and its level of debt.

The company's net debt position remains high, and I would like to see the gap between GAAP and non-GAAP earnings narrow through a reduction in one-time expenses.

The intrinsic value of the shares, using a discounted-earnings model, with an earnings growth rate of 9.37 percent, is $40 (not surprising, given the earnings decline), while the more conservative model of free cash flow to the firm yields an intrinsic value of $98.25. My earnings estimate for 2014 is $5.00, with a 12-month share price estimate of $50, for a 10 percent capital gain. There is also an annual dividend yield of 2.5 percent.

Lauren Rudd is president of Rudd International, an asset management firm. Neither he nor his employees hold any shares discussed or have plans to buy them within 30 days, nor is there any intended inducement to buy or sell any security. Email him at LVERudd@ aol.com. Calls accepted 10 a.m.- 3 p.m. at (941) 706-3449. Back columns at ruddreport.com. Rudd offers commentary Thursdays on SNN Local News during the 5:30 p.m. newscast.

<p>In the story of "The Ugly Duckling" by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of Teva Pharmaceutical Industries (Teva), an "ugly duckling" that just might mature into a beautiful swan in the ensuing year or two. See what you think.</p><p>Teva's shares recently hit a one-year high, rising 4.6 percent to $45.45, after the manufacturer of generic pharmaceuticals indicated it plans to return to the deal-making strategy that made it one of the most acquisitive drug companies of the past decade.</p><p>"We have to do the clever deals that Teva was so good at doing in the past," chief financial officer Eyal Desheh said recently. Desheh's tone signaled a major shift in approach from Teva's former chief executive officer, Jeremy Levin.</p><p>Erez Vigodman is the new CEO, and one of his key responsibilities will be to reduce costs by $2 billion to make up for this year's patent expiration of Copaxone, the company's top selling multiple sclerosis treatment.</p><p>Teva has received positive comments from analysts who see on-going potential and have raised their target price, and the Soros Fund increased its equity stake in the company.</p><p>So what do so many others fail to grasp? For one, Teva is the world's largest generic company with an established portfolio of specialty medications. So Teva is strategically positioned to benefit from the changing dynamics of the global health care industry as it shifts from patented to generic medications.</p><p>Generics accounted for 51 percent of Teva's total annual revenue in 2012. In the U.S., Teva accounts for about 16.2 percent of all generic prescriptions. And Teva's specialty pipeline includes candidates that focus on central nervous system and respiratory drugs, along with a selective innovation of products for oncology, women's health and biologics.</p><p>Yes, the patent expiration of Copaxone in the coming months is a major concern. Yet ProAir and Qvar are expected to add significantly to revenues. Teva also plans to enhance its existing brands, while developing products for asthma and chronic obstructive pulmonary disease with differentiated inhalers.</p><p>Teva has a solid respiratory pipeline with the recent FDA filing for approval of DuoResp, while a number of products in Phase II and III testing are designed to treat asthma. Approximately 8 percent of the U.S. population suffers from asthma and the number is growing. This arena could significantly add to revenue and earnings growth.</p><p>Teva trades at a conservative 9.72 times 2014 earnings. Revenues for the first six months of th`e year came in at $9.82 billion, down 2.7 percent year-over-year. Earnings fell from $1.72 billion to $178 million on the back of $1.62 billion in settlement, impairment and restructuring charges. Teva's guidance has 2014 revenues at around the $20 billion mark, while 2014 non-GAAP earnings are estimated at $4.85 to $5.15 per share.</p><p>The patent expiration of Copaxone could put $4 billion of revenues at risk. Yet the nearly $2 billion in planned cost savings and an increased generics pipeline have the potential to overcome that problem.</p><p>Nonetheless, two issues merit consideration: the restructuring and legal expenses inherent in Teva's focus on generics, and its level of debt.</p><p>The company's net debt position remains high, and I would like to see the gap between GAAP and non-GAAP earnings narrow through a reduction in one-time expenses.</p><p>The intrinsic value of the shares, using a discounted-earnings model, with an earnings growth rate of 9.37 percent, is $40 (not surprising, given the earnings decline), while the more conservative model of free cash flow to the firm yields an intrinsic value of $98.25. My earnings estimate for 2014 is $5.00, with a 12-month share price estimate of $50, for a 10 percent capital gain. There is also an annual dividend yield of 2.5 percent.</p><p>Lauren Rudd is president of Rudd International, an asset management firm. Neither he nor his employees hold any shares discussed or have plans to buy them within 30 days, nor is there any intended inducement to buy or sell any security. Email him at LVERudd@ aol.com. Calls accepted 10 a.m.- 3 p.m. at (941) 706-3449. Back columns at ruddreport.com. Rudd offers commentary Thursdays on SNN Local News during the 5:30 p.m. newscast.</p>